CNO Financial Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
CNO is a U.S. insurance holding company serving middle-income pre-retirees and retirees through Bankers Life, Washington National, Colonial Penn and a long-term-care run-off segment. Products include health insurance, annuities, individual life insurance and related services, distributed through career agents, independent producers and direct marketing.
This unaudited filing covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods. The company reported 167.8 million common shares outstanding as of October 19, 2017.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $1,079.3 million | $1,015.9 million | $3,207.1 million | $2,980.2 million |
| Income before taxes | $129.9 million | $49.3 million | $355.1 million | $172.5 million |
| Net income | $100.8 million | $18.6 million | $246.5 million | $124.0 million |
| Diluted EPS | $0.59 | $0.11 | $1.43 | $0.69 |
| Net margin | 9.3% | 1.8% | 7.7% | 4.2% |
| Net cash from operating activities | Not separately provided | Not separately provided | $433.7 million | $584.8 million |
- Premium collections were $882.4 million in Q3 and $2.747 billion for the first nine months, compared with $900.0 million and $2.659 billion, respectively, in 2016.
- Total assets were $32.705 billion at September 30, 2017, versus $31.975 billion at December 31, 2016. Shareholders’ equity increased to $4.882 billion from $4.487 billion, helped by net income and $311.2 million of after-tax other comprehensive income.
- Unrestricted cash and cash equivalents were $765.9 million, compared with $478.9 million at year-end 2016.
- Fixed-maturity investments were $22.130 billion at fair value; 95.8% of the portfolio was classified as NAIC 1 or 2 investment grade. Below-investment-grade fixed maturities represented 13% of amortized cost.
- Corporate direct obligations were $914.4 million. Additional investment borrowings were $1.647 billion, and borrowings related to variable-interest entities were $1.198 billion.
- Estimated consolidated statutory risk-based capital was 450%; estimated CLTX RBC was 390%.
Material Changes Versus the Prior Comparable Period
- Q3 net income increased $82.2 million, or approximately 442%, while nine-month net income increased $122.5 million, or approximately 99%.
- Results benefited from the absence of the $75.4 million loss on the 2016 termination and recapture of long-term-care reinsurance agreements.
- Pre-tax operating earnings, a non-GAAP measure, increased to $115.8 million in Q3 from $98.3 million and to $329.8 million for nine months from $275.3 million.
- Bankers Life pre-tax operating earnings increased to $106.9 million in Q3 from $88.1 million and to $309.2 million for nine months from $259.0 million. Colonial Penn improved to $9.0 million in Q3 and $16.7 million for nine months, versus $0.9 million and a $2.9 million loss, respectively.
- Washington National nine-month pre-tax operating earnings increased modestly to $74.6 million from $73.0 million, although reported income before taxes declined because 2016 included higher realized investment gains.
- Operating cash flow declined $151.1 million, principally reflecting the absence of 2016 cash received upon reinsurance recapture and higher income tax payments. Investing activities provided $363.3 million in 2017 versus using $273.6 million in 2016, while financing activities used $510.0 million versus $37.5 million.
- The company repurchased 6.7 million shares for $140.1 million during the first nine months and declared $44.7 million of dividends. The quarterly dividend was increased to $0.09 per share from $0.08.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q4 2017 Medicare supplement benefit ratios of 70%–73%, Bankers Life long-term-care interest-adjusted benefit ratios of 75%–80%, and Washington National supplemental-health interest-adjusted benefit ratios of 58%–61%.
- Colonial Penn expected 2017 earnings before realized investment gains and taxes of $18 million–$23 million, or $15 million–$20 million excluding a favorable $3.0 million adjustment related to insurance liabilities.
- The long-term-care run-off block had a nine-month interest-adjusted benefit ratio of 111.2% and remains in loss-recognition status. Management estimated that a 50-basis-point reduction in the ultimate new-money rate assumption could produce a $10 million pre-tax charge.
- Q3 included a $1.6 million after-tax out-of-period adjustment related to Colonial Penn life insurance liabilities. A separate $1.1 million after-tax adjustment was recorded in Q2 for Bankers Life long-term-care liabilities.
- The company recorded $18.2 million of investment impairment losses in the first nine months, including $5.7 million on energy-sector fixed maturities and $5.2 million on a mortgage loan. Future investment losses remain possible.
- On October 13, 2017, the revolving credit facility was amended: commitments increased from $150 million to $250 million, maturity was extended subject to specified conditions, and the maximum debt-to-total-capitalization covenant increased from 30% to 35%. The amount drawn remained $100 million.
- Management identified risks from low interest rates, investment performance, insurance mortality and morbidity, long-term-care claims and rate increases, reinsurance recoverability, regulatory approvals, litigation, tax-law changes, deferred-tax-asset realizability, ratings, liquidity and debt covenants.
- A proposed reduction in the federal corporate tax rate from 35% to 20% could have reduced deferred tax assets by approximately $250 million, reduced statutory capital by approximately $80 million and lowered the consolidated RBC ratio by approximately 85 percentage points, based on September 30 balances.
- Pending litigation includes disputes related to Beechwood Re and a Washington National matter with jury-awarded damages that were reduced by the court; appeals were pending. The company stated that material adverse outcomes were possible but not considered probable based on information then available.
Most Important Facts for Investors to Verify
- Whether long-term-care claims, persistency, rate increases and investment yields support the company’s reserve assumptions, particularly for the run-off block.
- The sustainability of improved operating earnings after excluding realized gains, derivative fair-value changes, tax valuation adjustments and other unusual items.
- Future realized investment losses, impairments and credit deterioration in below-investment-grade, structured and energy-related investments.
- Availability of holding-company liquidity and regulatory approval of dividends from insurance subsidiaries to service corporate debt and fund share repurchases.
- The effect of enacted tax reform, if any, on deferred tax assets, statutory capital, RBC ratios, cash taxes and earnings.
- Developments in Beechwood Re litigation and regulatory proceedings, including potential reinsurance recoverability and additional obligations.
- Progress toward the stated long-term-care risk-reduction strategy and the potential cost of any future reinsurance transaction.